Mining giant
Rio Tinto
has signed a back-office outsourcing deal with US tech player
IBM
, which is believed to be worth up to $100 million and will see the company shed between 700 and 800 positions globally.

Contracts are understood to have been signed a couple of months ago and work has commenced on transitioning finance and accounting, information technology and other work to IBM’s ­global teams. It is understood much of the English language work will be conducted from IBM’s operations in India, and other work from eastern Europe and South America.

The contracts could run for up to a decade, netting IBM $100 million. The work will be taken on largely in the new year, but some transitioning has begun and affected Rio staff are believed to have been informed.

Challenge of increasing costs

A spokesman for Rio confirmed the plans and said it was necessary to make the call to jettison some internal staff from positions that did not represent the core competencies of Rio Tinto. However he said it was too early to discuss the effect on specific roles.

“Like others in the mining industry, Rio Tinto is facing the challenge of increasing costs. We are actively seeking ways to reduce costs and improve productivity across the company," the spokesman said.

“Our core business is mining and it makes sense to partner with other companies for back office and transactional work. We are working with our partners to find opportunities to reduce our costs in support functions like HR, finance, IT and procurement across Rio Tinto’s global operations."

While Rio declined to discuss the specifics of the jobs to be sent to IBM, sources with knowledge of the situation said it was likely to entail up to 800 roles. The sources estimated Australian jobs would amount to less than half of the global number.

Related Quotes

Company Profile

The outsourcing comes as part of a push to strip costs out of Rio’s operations. Last November former chief executive
Tom Albanese
announced Rio would cut $5 billion from its mining operations to make up for weaker commodity prices and the impact of the strong Australian dollar. He warned job losses would occur if labour productivity did not improve at its Australian east coast coalmines.

Growing trend

Rio is the latest in a growing line of companies looking to make savings by outsourcing non-core process work to global suppliers. It is understood IBM won the contract in the face of fierce competition from established Indian-based outsourcing firms, which have secured local successes in recent times.

Infosys, Genpact and Accenture were believed to be among the unsuccessful bidders for the work.

Missing a trick

Managing director of niche outsourcing advisory firm Mindfields
Mohit Sharma
said Rio was missing a trick in pursuing a standard outsourcing model, and the company could have got the same service and made a profit by selling its back office to a supplier.

“Rio should have monetised their [finance and accounting] operations by carving it out, he said . . . IBM recently made an unsolicited bid for Qantas’s F&A operations for carving it out, so they would have been interested."

Head of resources at analyst firm CLSA, David Radclyffe, said the deal was relatively small in the context of the overall savings Rio is looking to make, but is a move in the right direction.

“Many programs like this could flow up to be something beneficial in time," Mr Radclyffe said.

“This is within the strategy they have spelled out to identify small and large cost cutting opportunities so this move makes sense."